How could we reward low-carbon companies with higher share price values?
This question led to the foundation of the [Environmental Investigation Organisation]( “EIO website”) (EIO), which aims “To create a market incentive for the worldwide reduction of corporate greenhouse gas emissions through the large scale use of index funds.”
As a step towards this, today they launched **a report ranking Europe’s largest 300 companies according to their greenhouse gas emissions**. The idea is to compare carbon emissions to turnover, to create an index that the EIO hope will feed into stock market decisions and ultimately increase the profits of greener companies.
Sam Gill, Operational Director of the EIO, said, “The purpose of the Carbon Rankings is two fold: to highlight the carbon emissions and levels of disclosure of the world’s largest companies with the aim of fostering greater transparency and to form the basis of a series of stock market indexes, designed specifically to provide the investment community with a viable tool for tackling climate change.”
The methodology is simple and based on publicly available data: compare reported carbon emissions to turnover (on a metric tonnes per million dollars of turnover basis). If a company has not reported its emissions, it receives the same as the worst performer in its sector. The worst performer – who has at least reported its emissions – remains higher in the ranking, meaning that transparency is encouraged rather than penalised.
If this helps drive up transparency it will complement the gains already achieved by the Emissions Trading Scheme, which requires mandatory reporting and verification, published publicly, from all participants. The benefits of this are clear in EIO’s figures, which show that the sectors covered by the ETS perform best in terms of transparency:
– Utilities 89% complete and verified + 1% complete but unverified
– Materials 59% compete and verified + 29% complete but unverified
Unlike Sandbag’s annual ranking of just those companies in the ETS, the EIO cannot accurately rank all the top 300 companies by carbon emissions, and this is _exactly_ the point – there simply isn’t the data to do so. Let’s hope the Ranking, and media coverage it generates, drives a virtuous cycle where companies seek to improve their rating by at least reporting their emissions.
As to whether the second stage of a related index follows, this would be a genuinely powerful tool that could work alongside policy: expectation of tougher restrictions/higher prices on carbon in the future will be one of the key drivers for lower-ranking companies to loose share value. It is sorely needed. According to a recent article in the Financial Times:
“Look at the trends, and it seems the smart money is betting on business as usual… [Institutional investors] are more interested in de-risking than greening.” (Financial Times, 19 April 2011)